Is the Prime Central London Recession Anomalous?

Updated: Jan 17

(LUDGROVE NEWSLETTER - DECEMBER 2020)



In previous Ludgrove newsletters we have commented on the severity of the Prime Central London (PCL) property recession and how cheap PCL appears. Our research has shown that the downturn from the 2014 peak is the longest on record and values have declined by 30% in real terms, erasing 13 years of growth. No other PCL recession comes close in terms of duration and the number of years of growth eroded. However is this justified and if not, has negative sentiment presented a pricing anomaly offering home buyers, investors and developers a buying opportunity? Our CEO and former Fund Manager Fraser Slater takes a look.


Context: PCL Prices are at a 13 Year Low

In nominal terms PCL prices peaked in 2014 and have fallen 16%. However over the long term it is important to assess property prices in real (ie inflation-adjusted) terms to adjust for changes in purchasing power. After the market peaked in mid-2014 prices have fallen 30% in real terms and have now returned to mid-2007 levels. Effectively then, there has been zero growth in PCL values in the last 13 years:



Whilst PCL has Been Left Behind in a World of Asset Price Inflation

Taking Q2 2007 as a starting point, negative real interest rates and vast sums of Quantitative Easing has propelled asset values higher across the board, leaving PCL behind. The chart below compares the real-terms growth in prices since Q2 2007:



And Global Wealth Has Surged Ahead

Global prime and ultra-prime property tends to be closely correlated with the Global Wealth rather than traditional housing metrics such as income affordability. Below we look at the (nominal) growth of PCL versus the Credit Suisse Global Wealth Index from 2007. PCL is currently a record 22% below the Global Wealth Index suggesting a catch-up is well over due:

Wholly Out of Kilter with London

All-off the above suggests the recent PCL recession is anomalous, however what is most remarkable is how this recession compares to the mainstream London market in previous recessions. As one would expect past recessions have shown a strong correlation; with PCL typically performing in line with London, plus or minus 4-6% percent (see below). However this recession has seen a -16% nominal decline in prices whilst the mainstream market has powered ahead by +25% leading to a staggering -41% lag between PCL and London:



Certainly tax changes, the threat of a hard-left Government, Brexit and Covid have disproportionately impacted PCL over the last 6 years. However can we justify such a difference?


Taking each factor in turn, our calculations show that stamp duty should account for c5% of the move, the threat of a hard-left Government has disappeared (implying zero impact is justified), Covid may account for a further 5% (as PCL declined -1% in 2020 vs London which appreciated by +4%) which implies Brexit (or any other factor) accounts for 31% of the differential. This looks like a very large overshoot. And at the very least, we find it extremely hard to argue there is much further downside in the PCL market from here.


Conclusion:

Over the last 6 years sentiment has been depressed by tax changes, the threat of a hard-left Government, Brexit and Covid. Prices have also underperformed the mainstream London market by -41% and this is out of kilter with prior recessions and extremely hard to justify. When combined with QE-driven asset price inflation and the growth in global wealth since 2007, PCL looks anomalously cheap in our opinion.


Fraser Slater

Chief Executive of Ludgrove Property Ltd

Tel: +44 (0)207 889 2860

Email: info@ludgroveproperty.com

Web: www.ludgroveproperty.com



Biography: Fraser Slater is the CEO and Founder of Ludgrove Property. Prior to Ludgrove Fraser spent 20 years in The City. In the course of his career he was a Real Estate Analyst, the Fund Manager of a £6bn Equity portfolio for USS Ltd and the Founder and CEO of WDB Capital, a London based Fund Management business. In 2008 WDB Capital outperformed its peer group by +52% making Fraser's portfolio one of Europe's best performing Funds during the Financial Crisis. In the same year his Fund was nominated New Fund of the Year by EuroHedge. After leaving The City, Fraser started Ludgrove with an ambition to be Prime London's leading Property Buying agency with an emphasis on original research and delivering a highly value-added service to clients.


Disclaimer: Ludgrove Property Limited is not authorised or regulated by the Financial Conduct Authority (FCA) and we do not provide any financial or investment advice. We recommend that any property investor seeks appropriate professional advice before entering into any contract, and we would also advise that the value of any investment can go down as well as up and that you might not get back what you put in. You may have difficulty selling a property investment at a reasonable price and in some circumstances it might be difficult to sell at any price. We would urge you not to invest unless you have carefully thought about whether you can afford it and whether it is right for you, and if necessary to consult with a professional advisor in accordance with the Financial Services and Markets Act 2000. All information is provided strictly as a guide only, is subject to change without prior notice and does not constitute an offer of investment. The Ludgrove website should not be regarded as an offer or solicitation to conduct investment business, as defined by the Financial Services and Markets Act 2000. Investors who are resident in or citizens of countries other than the United Kingdom may be subject to local restrictions. In particular, no offer or invitation is made to any US persons (being residents of the United States of America or partnerships or corporations organised under the laws of the United States of America or any state, territory or possession thereof), who are excluded from the services offered in this site. The information on this website and our publications has been obtained from sources which we believe to be reliable and accurate, but without further investigation this cannot be warranted.



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